AN INTRODUCTION TO BUSINESS ETHICS CHAPTER THREE: CORPORATE SOCIAL RESPONSIBILITY AN INTRODUCTION TO BUSINESS ETHICS Copyright © 2014 by McGraw-Hill Education. All rights reserved.

This chapter seeks to Help students continue developing the ability to identify and analyze ethical issues in business Explain the ethical foundation for the classical model of corporate social responsibility Review the ethical challenges to utilitarian and rights-based justifications of the classical model Explain how the classical model is extended and developed through a moral minimum Describe the stakeholder model of corporate social responsibility Explain the ethical foundations of the stakeholder model 3-2 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart New York Times reported in 2012 that a six-year internal investigation found widespread bribery and corruption within Walmart’s Mexican operations Walmart employees paid $24 million in bribes to promote expansion of business in Mexico Walmart executives in Mexico knew of the bribes, and hid them from U.S. Walmart corporate offices When the internal investigation was shared with corporate headquarters, Walmart executives ended the investigation 3-3 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) The Times also reported than only upon learning of the newspaper’s own investigation and plans to write a story did Walmart executives notify legal authorities The U.S. Justice Department began an investigation of possible violations of the U.S. Corrupt Foreign Practices Act 3-4 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) Walmart is the world’s largest retail business, claiming over 200 million customer visits per week at more than 8,100 retail stores in 15 countries Its total sales for fiscal year 2011 were $418 billion Worldwide, it employs over 2.1 million people It is the largest private employer in the U.S. and Mexico, and the largest employer in 25 U.S. states 3-5 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) In many ways, Walmart is a socially responsible corporation Values promoted by Wal-Mart include honesty, respect, fairness and integrity Wal-Mart culture was founded on three basic beliefs: respect for individuals, service to customers, and striving for excellence Defenders point out that its economic success is evidence of how well Walmart is fulfilling its social responsibility 3-6 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) Walmart has created immense value for shareholders, consumers, suppliers, and employees It regularly contributes to community and social causes The Walmart Foundation is the largest corporate cash contributor in the U.S. In 2009, it donated more than $378 million in cash and in-kind gifts to charitable organizations It has major sustainability goals for its operations: becoming more energy efficient, reducing its carbon footprint, reducing wastes and packaging 3-7 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) Critics portray Walmart as among the least-admired corporations in the world Ethical criticisms have been raised against Wal-Mart on behalf of every major constituency—customers, employees, suppliers, competitors, communities—with whom Wal-Mart interacts 3-8 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) Critics claim that Walmart engages in deceptive and manipulative pricing Low-priced goods and their placement in stores are a ploy to entice customers to purchase more and higher priced goods Walmart aggressively controls labor costs through low wages, minimum work hours, high productivity, and keeping unions out 3-9 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) Critics claim that Walmart pays its workers poverty-level wages While Walmart offers health care benefits to its employees, compared with other companies, Walmart employees pay a disproportionately high percentage of the cost Walmart has created a government subsidy for its low wages 3-10 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) Walmart has been accused of illegally requiring employees to work overtime without pay and to work off-the-clock Walmart has been sued for violating the Americans with Disabilities Act Walmart is being sued for illegal anti-union activities Walmart has been cited for being in violation of child labor laws 3-11 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) June 2001, current and former employees from California, Illinois, Ohio, Texas, and Florida, filed a class-action lawsuit against Walmart alleging sex-discrimination against women employees October 2003, federal raids on 60 Walmart stores in 20 sates resulted in the arrest of over 250 illegal aliens working as janitors in Walmart stores – a ploy to lower wages, deny overtime pay and exploit illegal status of employees 3-12 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) Many local communities criticize Walmart as a major factor in the demise of small towns and local businesses Walmart’s aggressive strategy to lower costs is criticized for the harms it can cause suppliers to bid against each other in a type of “reverse auction” in which suppliers compete to see who can offer their products at the lowest prices resulting in suppliers going out of business 3-13 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Discussion Case: Walmart (cont.) The “Buy American” campaign from the 1980s is responsible for the loss of American jobs as American businesses have been forced to outsource their production as the only means to meet Walmart’s price targets Walmart has been accused of using suppliers in China, Central America, and Saipan who use sweatshops to produce clothing for Walmart 3-14 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Business Ethics is normative What is the proper role of business management in making decisions? What is the proper role of business in society? Do business managers have an overriding ethical responsibility to serve the interests of stockholders before acting for society’s interests? 3-15 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Classical Model of Corporation Social Responsibility Roots in free market economic theory Most influential theory of corporate responsibility in last century Milton Friedman, Nobel-prize winning Economist: “[In a free economy], there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game…” 3-16 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Classical Model of Corporation Social Responsibility Milton: By disregarding the role assigned management by the free market theory we would likely “undermine the very foundations of our free society.” “The market” is one of the most influential public policy philosophies in history 3-17 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Classical Model of Corporation Social Responsibility Example: Walmart - Despite lawsuits and regulatory infractions, we can assume, as a matter of corporate policy, Walmart has always been committed to obeying the law - Walmart’s managers have sought to maximize stockholder profit within the law 3-18 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Classical Model of Corporate Social Responsibility How would “the market” evaluate Walmart’s strategy? Efficiency means that more beneficial consequences result from each spending decision. Efficiency attracts more investors whose resources can be used to increase business Society benefits 3-19 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Classical Model of Corporate Social Responsibility The right of private property: business is understood as private property Pursuing any social objective other than the maximization of profit is spending someone else’s money for your own purposes. This is ethically equivalent to theft. Business management must pursue maximum profits under this model 3-20 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Classical Model of Corporate Social Responsibility Government must have a laissez-faire approach to business Freedom from government regulation and control, allows the market to function most efficiently 3-21 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Assessment of Classical Model Are free markets adequate as means to the ends of maximally satisfying consumer demand? Are the ends pursued by free markets appropriate as legitimate ethical goals? 3-22 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Assessment of Classical Model Market failures: the pursuit of profit will not result in a net increase in consumer satisfaction Pollution Resource depletion Ground contamination No pricing mechanism exists for these public goods, therefore no means exists to ensure that these goods get allocated to those who most value them 3-23 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Assessment of Classical Model Market failures: the pursuit of profit will not result in a net increase in consumer satisfaction Self-interested behavior results in worse outcomes than if behavior had been coordinated (Prisoner’s dilemma) Food additives Vehicles that use too much gasoline and pollute the air Exposure to workplace chemicals 3-24 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Assessment of Classical Model The market is so complex that it is extremely unlikely that a single and simple directive such as maximize profits will produce the greater overall good in all cases and in every situation Questions about public and social goods remain unasked from within market transactions: what is good for individuals is not necessarily good for society 3-25 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Assessment of Classical Model Utilitarianism is a pragmatic theory Because we can never know the future in a complex and changing world, Utilitarians remain ready to revise their principles in light of changing consequences Utilitarian-market principles should be: Maximize profit when doing so produces the greatest overall good for the greatest number of people 3-26 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Assessment of Classical Model Ad hoc attempts to repair market failures are socially inadequate - First generation problem - Inappropriate influence - Consumer preferences are addresses only as they are expressed in the market: there is no guarantee of happiness 3-27 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Assessment of Classical Model Economic growth measures only the quantity of what consumers spend, it does not assess the quality of what they are purchasing with that spending Efficient markets provide no substantive ethical basis for evaluating the ethical content or quality of consumer choice 3-28 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Assessment of Classical Model Milton Friedman recognized limits to the pursuit of profits Stay within the rules of the game Conform to the basic rules of society These restrictions are minimal. 3-29 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Private Property Defense Do the rights of private owners supersede the consequences of the market? Property rights are not absolute. One’s right to use property is constrained by the rights of others. The property rights of stockholder: limited legal liability Understood in the proper context: distinction between investors and owners 3-30 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Moral Minimum Normal Bowie: the pursuit of profit is constrained by an obligation to obey a moral minimum This framework distinguishes between Ethical imperatives to cause no harm Ethical imperatives to prevent harm Ethical imperatives to do good While it is ethically good for managers to prevent harm or to do some good, their duty to stockholders overrides these concerns 3-31 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Moral Minimum Distinguishing between these three imperatives is a major challenge For every case in which stockholder interests appears to conflict with the interests of employees, consumers, suppliers or society, business management must carefully analyze the situation to determine ethical responsibility 3-32 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Moral Minimum Compliance with the law is insufficient for an ethically responsible business 3-33 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Stakeholder Theory Every business affects a wide variety of people - benefiting some and imposing costs on others The Stakeholder theory rejects the premise that the primary beneficiaries of business decisions should be investors 3-34 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Stakeholder Theory William Evans and R. Edward Freeman: Narrow and Broad Stakeholder theory Narrowly: A stakeholder includes “any group who are vital to the survival and success of the corporation” Broadly: A stakeholder is “any group or individual who can affect or be affected by the corporation?” 3-35 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Stakeholder Theory While it was true a century ago that management had an overriding obligation to stockholders, the law now recognizes a wide range of managerial obligations to stakeholders such as consumers, employees, competitors, the environment, and the disabled What is fiduciary duty? 3-36 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Stakeholder Theory Stakeholder theory requires management to balance the ethical interests of all affected parties Stakeholder theory requires that management consider the consequences of its decisions for the well-being of all affected groups 3-37 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

The Stakeholder Theory Challenges to Stakeholder theory: Problems with identifying stakeholders and their interests Problems deciding what course of action follows from the imperative to balance stakeholder interests Stakeholder theory seems to offer little practical advice to managers 3-38 Copyright © 2014 by McGraw-Hill Education. All rights reserved.

Conclusion Corporate Social Responsibility Models lie across a continuum Moderation occurs as the range of constraints increases upon the pursuit of profit These theories are variations on the balancing of utilitarian and deontological ethics Whose interests should reign supreme? 3-39 Copyright © 2014 by McGraw-Hill Education. All rights reserved.